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 Post subject: Emergency Fund - can I call it good? =)
PostPosted: Mon May 14, 2007 8:58 pm 

Joined: Mon May 14, 2007 7:20 pm
Posts: 309
Emergency funds

While I agree with the general concept of emergency funds (what is there to disagree about?), I'm hesitant to dump a full 3-6 months salary in them. I've heard some even suggest a years worth of living expenses. (Background, graduated about 1 year ago with $0 in the bank and -26k in loans)

I agree it's important to have money for things like unexpected car problems or other emergencies, but ignoring the dire emergencies (which no ammount of money really could cover), I don't see the need to go beyond my current savings of about 4k. In fact, I'd be comfortable with less, maybe 2k or so.

If I lost my job and couldn't get another one (unlikely), couldn't I waitress or something? Or if not, aboslute worst case (medical, accident), my parents would take me in. It would be horrid, but not catastrophic.

I'm single and don't have dependents at this point, but my boyfriends opinion is that I should have 10k tucked away for an emergency. Of course, as of now, I don't have to take his opinion too heavily, but I was curious to what others though.

I think it would be much wiser to take the difference (6-7k) and add it to my 401k, or to pay down some student loans (though that is more of a psychological benefit than wise-ness!). At the very least, not have it earmarked as emergency, but perhaps as "saving for wedding/car/downpayment on house". I'm really just starting to lay the foundation of a financial future, and there is only so much money, and about a million ways to slice the pie!

I'm not of the type to say, "well now. That emergency savings is funded, now I can spend that 600/mo on whatever I want!" I just wonder if I'm mistaken to think that, being young and relatively free from burdens, I can skimp on the emergency fund a bit. What do you think?

(PS, I'm new here... freshly signed up and exceeded login attempts for having caps lock on! Ooops. Thanks for taking the time to read this!)


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PostPosted: Tue May 15, 2007 12:07 am 
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If you really could survive on waitressing, then you probably don't need a big emergency fund. What about if you got ill or had an accident, how would you manage then?

Part of thinking about an emergency fund to me, is working out what you would do in some worst case scenarios, and then seeing whether those options could really work.

Also, for me, security is an issue. I'd much rather have a large safety net even if its slightly irrational, but you may be different.

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PostPosted: Tue May 15, 2007 1:48 am 
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I guess part of it is how you define "emergency fund". If you're talking about money that is strictly reserved for actual, alarms-ringing emergencies, then it's probably fine, unless your threat matrix includes "needing to bail someone out of jail" or something like that. (My cousin, who is a cop, informs me that they typically don't take credit cards for that.)

For me, I sort of define it as "money for something I need money for that isn't covered by current income". That would include short-term savings. My actual "emergency fund", defined as "cash I can put my hands on quickly without access to a computer", I keep at about $2000 -- even that seems a bit high, but it's my comfort level, so I stick with it. The rest of my short-term reserves are in a high-yield account, and that's where I'll go for a car down payment, major unexpected repair expenses, the rare large purchase, etc., so it's not strictly an "emergency" fund, but it works as one anyway.

The real, down-and-dirty emergency fund is the $200 cash I keep, already written off the books as an expense, in my "bug-out bag" that I keep packed. That's the one I grab if the house is falling down around me and I need to go right the hell now.


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PostPosted: Tue May 15, 2007 7:04 am 

Joined: Tue Apr 17, 2007 11:16 am
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If you have health insurance and would be willing to live with your parents if you lost your job, I agree that you probably don't need a huge e-fund.

My husband and I have a very large e-fund (around $35k) despite being young (late twenties) and very employable, mostly because we don't live near our parents (closest are mine, 4.5 hours away) and would hate to have to leave our life here.


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PostPosted: Tue May 15, 2007 7:26 am 

Joined: Tue Apr 17, 2007 9:34 am
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Location: Deep in the heart'a
I don't think there is an absolute value you can put on an emergency fund. Each person's fund should reflect their own needs. I calculate that I want/need around 5K in my Efund.

I do not keep money for living expenses in the emergency fund. If I were laid off, or even fired, I would have funds available from investments in the company I work for, so that is covered. The emergencies that I've had to deal with over the past five years have involved major home repair and maintenance, car repair, medical expenses, and pet/veterinary expenses.

My biggest emergency expenses have been for my home. I've had a tree through the roof, dead water heater, dead stove, air handler replacement, and leaky plumbing. Other little things - like broken glasses or unexpected medical & vet bills - also come out of this fund.

I like it around 5K, but right now it's at 3200 because I've had to use it!

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PostPosted: Tue May 15, 2007 8:01 am 

Joined: Thu Apr 05, 2007 6:27 am
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Location: USA
Do you have long-term disability insurance? (To wit: Insurance that provides supplementary income to those physically unable to work and earn a paycheck. If you get hit by a bus and are severely injured, you probably won't be waitressing without several months of physical therapy.)

If yes, then you can probably scrimp on the fund.

I don't have LTDI because it's wildly expensive, so I am making do by building a safety net out of my annual and sick leave, as well as an emergency fund. My shorter-term goal is to get to a full two months of expenses plus an extra $500 right at the bank. From there, I'll see what makes the most sense.

At any rate, I think if you consider moving back home to be your last resort plan, then you should have the funds to cover potentially breaking your lease (round here, that's two month's rent), covering your last month of utility bills associated with said lease, and travel home, plus whatever would give you catastrophic health insurance coverage.

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PostPosted: Tue May 15, 2007 10:06 am 
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Location: Chicago
Quote:
I'm single and don't have dependents at this point, but my boyfriends opinion is that I should have 10k tucked away for an emergency.


The reason for an emergency fund, as I see it, is to protect your other financial planning, so that when (not if!) something comes up that you haven't planned for, you don't have to sacrifice your 401K or your credit-card-freedom. Right now, your fund is probably plenty for the type of emergencies you are likely to have, and your standard of living. Keep in mind though, that if money becomes scarce on a wider scale, food service jobs are likely to be hit first and hardest. When people don't have money, they don't go out to eat, and they tip less when they do.

I'd say that you're probably in a good place right now, but I'd try to stay ahead of the game. Start working on your other financial goals, but continue to grow your EF while you're at it. That way as your life changes, you'll always have an EF you're comfortable with. If you get a new job, and with it a higher standard of living, you won't suddenly feel like your emergency fund is much too small.

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PostPosted: Tue May 15, 2007 2:19 pm 

Joined: Wed Apr 04, 2007 8:45 pm
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First off, welcome SJean! I see your point...when you're fresh out of college, 4K can seem like a good bit. I like the suggestions made so far...and you made a good point about being able to find alternate means of income. What would happen if your car or other means of transportation broke down (and by broke down, I mean apocolyptic catastrophe)? Would you have the means to continue working? Maybe I'm just too conservative, but I still feel comfortable with the 6-month salary rule.

I guess the better question is "Why are you not wanting a larger emergency fund?". You can only put so much in IRAs...is there some overriding reason against a larger emergency fund?


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 Post subject: Reasons I wouldn't mind delaying...
PostPosted: Tue May 15, 2007 3:57 pm 

Joined: Mon May 14, 2007 7:20 pm
Posts: 309
Here are some reasons I am not that interested in growing my emergency fund much more.

-My Roth IRA is on track to be maxed, but my 401k isn't anywhere close to the limit.
-I wouldn't mind paying off student loans more quickly, but realistically, this isn't the best use of money anyway
-I would like to start trying out some savings that are slightly less liquid: money market funds or T-bills. And to have that money earmarked for future purchases rather than emergency: house downpayment (at least 5 years), new car (several years--I dream of paying cash), or less important, a vacation (I value travel highly... but am resisting for now)

If my car had suddenly became undriveable, I could get rides to work as a short term solution (I live in a smallish city, no big commutes, know a couple people at work that live close enough) or ride bike if the weather was good. Now, I don't OWN a bike, but I could easily get one with my emergency funds! I do have some sort of long term disability insurance through work, though i'm rusty on the details (I'm young, therefore invincible :) )

Six months is a lot of money, especially when you have only been working 12!

But I do get the point.... Realistically, I think part of it is that it's not very "fun" or "interesting" to stick money in a savings account, especially with no "goal" tied to it. That is a silly reason to make a financial decision though!

Based on comments I think that I'm going to keep building it... But maybe when it gets a bit higher, still try out some things slightly less liquid, but still "safe"!


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 Post subject: Re: Reasons I wouldn't mind delaying...
PostPosted: Wed May 16, 2007 3:01 am 

Joined: Sat Apr 07, 2007 2:03 am
Posts: 872
Location: Taishan, Guangdong, China
SJean wrote:
I would like to start trying out some savings that are slightly less liquid: money market funds or T-bills. And to have that money earmarked for future purchases rather than emergency: house downpayment (at least 5 years), new car (several years--I dream of paying cash), or less important, a vacation (I value travel highly... but am resisting for now)


I mentally treat all my liquid funds (online savings, money market, CDs) as one pool designed for emergencies and opportunities. If something happens while saving for a house/car/dreams/whatever and I have to draw down on it, that pushes my timeline further off into the future. Of course, the plan is to not need to tap it for emergencies with enough insurance coverage and fallback options.


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PostPosted: Wed May 16, 2007 12:21 pm 

Joined: Fri May 04, 2007 8:14 pm
Posts: 1755
SJean,

I have sent you a PM regarding your question. Please check your inbox.


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PostPosted: Thu May 17, 2007 9:01 am 

Joined: Thu May 17, 2007 8:52 am
Posts: 5
jer wrote:
I guess part of it is how you define "emergency fund". If you're talking about money that is strictly reserved for actual, alarms-ringing emergencies, then it's probably fine, unless your threat matrix includes "needing to bail someone out of jail" or something like that. (My cousin, who is a cop, informs me that they typically don't take credit cards for that.)

For me, I sort of define it as "money for something I need money for that isn't covered by current income". That would include short-term savings. My actual "emergency fund", defined as "cash I can put my hands on quickly without access to a computer", I keep at about $2000 -- even that seems a bit high, but it's my comfort level, so I stick with it. The rest of my short-term reserves are in a high-yield account, and that's where I'll go for a car down payment, major unexpected repair expenses, the rare large purchase, etc., so it's not strictly an "emergency" fund, but it works as one anyway.

The real, down-and-dirty emergency fund is the $200 cash I keep, already written off the books as an expense, in my "bug-out bag" that I keep packed. That's the one I grab if the house is falling down around me and I need to go right the hell now.


I agree with Jer. I define my "emergency fund" as something completely unexpected that I didn't budget for with my regular income, such as car repairs. I have a pretty stable job, so job loss isn't something that crosses my mind much but it could happen to any of us. So my emergency fund totals $3000 for car repairs and potential, although highly unlikely, job loss. Now if emergencies come smack me all at once, then up a creek without a paddle.


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